Outgoing General Motors CFO Chuck Stevens has been with company for four decades, but I’m not sure he’s ever used the word “headwinds” as often as he did on a conference call following the carmaker’s second-quarter earnings on Wednesday.
GM posted a bottom-line beat of analysts’ expectations and raked in about $36 billion on the top line . But the company was forced to trim its full-year profit guidance from 10% to what Stevens terms a 9-10% range.
Stevens noted that GM is facing a net headwind of $1 billion more than it originally expected — and that’s taking into account that the company was already going to confront challenges as it launches a major redesign of its full-size pickup trucks.
A chunk of that $1 billion is foreign-exchange problems with the South American market. But $600-700 million, in Stevens’ analysis, is due to more expensive steel.
“The new issue is commodity escalation,” he said, adding that GM was dealing with “unexpected pressure on the steel side.”
GM shares slid 5% on Wednesday, to $37.
“GM buys most of its steel from US producers, who have raised prices in reaction to tariffs on imported steel imposed by the Donald Trump administration,” Reuters reported after GM posted its quarterly results.
What will Detroit do?
Invariably, Wall Street analysts wanted to know whether GM would ask suppliers to share the pain, which raised the specter of the carmaker’s pre-bankruptcy past, when dealings with suppliers could be brutal. Stevens said that GM has a far more constructive relationship with suppliers than it did in the past. But neither he nor CEO Mary Barra ruled out negotiations.
Fiat Chrysler Automobiles also suffered in the markets Wednesday, down a whopping 12% to $17, slashing substantial gains over the past 12 months.
CFO Richard Palmer assumed the somber duty of delivering the bad numbers, following the Wednesday morning announcement that former CEO Sergio Marchionne had died after falling into a coma following shoulder surgery.
Under the circumstances, Palmer was remarkably calm (Marchionne, who often bantered with his CFO on earnings calls, would have been proud).
“We buy steel in regions where we produce,” Palmer said. He indicated that FCA as a group isn’t overly concerned about steel prices now, but he added that the carmaker would “keep an eye on the first part of 2019” and said that there would “clearly be a negotiation with suppliers … discussing how we can share the impacts of raw materials increases.”
On balance, Trump is lucky that the US economy is at full-employment and that the Detroit big three — GM, Ford, and FCA — have been raking up massive profits for years amid a boom in SUV and pickup-truck sales.
Headwinds on tricky seas
But the industry is entering a tricky period. FCA has just endured the unexpected death of its CEO and is heavily reliant on pickups and the Jeep brand to maintain profits in North America. Incoming CEO Mike Manley, who had been running Jeep, is now staring down tariffs, a trade war, and an uncertain future for NAFTA while trying to take over at the most international of US automakers.
GM is trying to maintain profits in its core business while attacking new opportunities, such as its Cruise self-driving technology, which is slated to launch in 2019.
But it just got hit with headwind costs that are double what it anticipated: $1 billion versus $500 million. And it remains to be seen what a possible trade war will do to GM’s China business, which has been strong, but that’s based on joint ventures with Chinese partners.
As a whole, the industry is enjoying higher sales in the US than it expected, after three record or near-record years. Transaction prices are also high enough to offset some tariff damage, and Detroit should benefit from a corporate tax cut. But sales will have to decline at some point, intensifying competition in the hyper-competitive US market and stressing automakers’ balance sheets.
Managing in this environment was already going to be tough. Throwing in higher costs on steel in particular is a headache that nobody needed.